Too many file associations in the new VLC 2.0.4. I had a time of it just trying to delete everything it attaches to after I had selected no file associations on a reinstall.
However, a helpful site had a work around for this intrusion. The suggestion was to install the VLC Portable version.
Portable version contains all the same tools so far as I can tell and the media screen looks the same.
If you have this file association problem:
Uninstall VLC using ad/remove in the Windows XP etc control panel.
Then run Start > Search > All files and folders > *vlc*.*
You will see several files listed. Delete those four or so files with names like 'prefetch.' Run Start > Search again just to make sure.
Install VLC Portable 2.0.4 and the rest of your system should load the file associations it already has for other programs.
To use VLC with an AVI, right click on the AVI and request Open with... Browse to VLC and enjoy your media.
Hopefully future versions of VLC will make it clear and understood what mass file associations will do to your computer and have a safe and reliable alternative to avoid this in the future.